Emerging markets are in the news again, for good reasons and bad.
For the good, look no further than the winter Olympics in Beijing. And reflect that China’s economy has tripled in size since it hosted the summer games, just 14 years ago. China, just an undeveloped rising star a generation ago, is now the world’s biggest economy.
On the other hand, for the bad, look no further than Russia’s threatening moves against Ukraine. Or look at the economic crisis in Turkey. Or, for that matter, look at China—where the cases of tennis star Peng Shuai, the religious Uyghur minority, and the longstanding threat against Taiwan all remind us that the country remains unfree.
Emerging markets, which include such economies as China, Russia, India, Brazil, South Africa and the like—have a racy reputation among investors. They are seen as volatile and “high risk.” As we get older, we tend to dial down the risk in our portfolios generally. And that’s especially true once we’ve retired, when most people look for financial stability and income.
So it may be tempting to think that such emerging markets have no place in your portfolio once you’ve retired. Especially amid the current uncertainty. And especially after recent performance: Emerging market indexes performed poorly again last year, even while the U.S. and many developed markets, for example in Europe, did well.
But you might want to think again.
Many financial advisers say investors should keep emerging markets in their portfolios even after retirement, despite any risks, for a very simple reason: diversification.
“Any equity investor should have EM (emerging markets) in their portfolio,” says Kenneth Waltzer, managing director of KCS Wealth Advisory in Los Angeles. “Diversification means investing globally, as this both reduces risk and can increase return. For EM stocks in particular, they tend to follow cycles that can be opposite the US.”
If older investors want to dial down the risk in their portfolio, he says, they should look at cutting their overall exposure to stocks in general, not simply at cutting their exposure to emerging markets. “An older investor might not have less EM in their equity allocation than a younger investor, but they are likely to have less equity exposure overall,” he says.
David Shotwell, a financial adviser at Shotwell Rutter Baer Financial Planners in Lansing, Mich., agrees. “Emerging markets offer diversification from U.S. and developed domestic markets as they do not move (in) lockstep with those markets,” he says. “We limit emerging market exposure to 10% of our overall stock exposure. So older investors have exposure as well. For example, a 50% stock portfolio would have 5% in emerging markets.”
The key, he says, is sticking with the portfolio, and not getting thrown off track by headlines or short-term volatility. “By the time headlines like Ukraine are printed the markets have already moved,” he says….
Read More: Opinion: Are emerging markets too ‘risky’ for retirees?